In 2019, deconstruction personal property appraisal inflations gained increased notoriety with the case Mann v. US, decided on summary judgment January 31st, 2019. In this case, an appraiser produced unqualified appraisals that were subsequently rejected by the IRS. In this case and like the many other audits that disallowed a taxpayer’s deduction, the punitive measures rest solely on the taxpayer in the form of disallowing the entire deduction and substantial underpayment penalties: 20% when the appraisal is 200% over-valued and 40% when 400%.
How are these inflations incorporated into an appraisal? Unlike derivative currency hedging or self-directed IRA valuations, the approaches used to inflate an appraisal are relatively simple.
Top Ten Ways to Inflate Deconstruction Appraisals:
- 1Nonprofit emails out a project to multiple appraisers initiating a bidding war as to who can provide the highest appraised value initial quote, hence winning the contract and collecting appraisal fees.
- 2Using the Cost Method inappropriately. Only the Comparable Sales Method should be used when researching similar material re-sale price points in the applicable regional market. The Cost Method takes the cost of brand-new materials and applies a depreciation rate to arrive at final value. This almost universally results in inflated values. RS Means, new construction costing software, is sometimes used in these appraisals and there is written documentation going back twenty years promulgating the utilization of the Cost Method from current nonprofit industry leaders. In most cases, used construction materials are like a brand new car being driven off the lot—the value drops precipitously. Unethical appraisers will easily manipulate data within the software to reach higher values for the client and nonprofit. They can subsequently charge incredibly high appraisal fees knowing their appraisals will result in a much higher tax deduction.
- 3When the Comparable Sales Method is actually used, the appraiser will find the highest valued and very inappropriate comparable sales often outside the geographic region and a glaring outlier should comparable sales be graphed. By refusing to calculate the range, mean, mode and median and then choose comparable costs based on simple statistical modeling, high price points can be cherry picked. These prices sometimes pertain to sales not only non-geographically relevant but sales that took place years ago.
- 4Nonprofit or client calls the appraiser and communicates the initial quoted value range is not as high as they would like and requests what can be done about this. Unethical appraisers have proven to be happy to tack on value to make the nonprofit and client happy. Their motivation in keeping the nonprofit happy is to secure more appraisal referrals and pleasing the client can result in more business. The ethical appraiser, when receiving this posed question should respond, “The value will increase if you have more materials or property to donate. If not, the value is set in stone and the request you made is the equivalent of asking me to commit fraud—blatantly.”
- 5Nonprofits and existing appraisers steer new appraisal trainees to use the Cost Method by providing sample spreadsheets demonstrating how the method works and training them in new construction software costing like RS Means.
- 6Nonprofit basing monetary contribution requests of client based on a percentage of appraiser’s initial quoted value range or correlating. This further perpetuates fraudulent practices from both the nonprofit and the appraiser by pressuring the appraiser to make those initial value range quotes very high. The appraiser then exerts pressure on their staff to back into those initial quotes using whatever means possible.
- 7Monetary contributions listed above are represented to clients as 100% deductible as monetary charitable contributions when, in fact, a portion of those payments are a fee-for-service covering the cost of the deconstruction services they are receiving in lieu of the demolition contractors they would have needed to hire.
- 8The appraiser inflates quantities of materials. Five doors is changed to ten, 25 windows is changed to 35 and hardwood floor panels go from 300 to 500 hundred. These small and simple quantity inflations the appraiser hopes will go unnoticed by the nonprofit—and they add up quickly. Furthermore, the nonprofit is not policing the appraiser and rarely views the final appraisal and does not take the time to match up inventories of received materials vs. appraised materials.
- 9The appraiser changes the quality of materials. Cheap wood veneer suddenly becomes Brazilian Cherry hardwood flooring. See above for the lack of accountability as there is no check on these fraudulent representations. To make this inflation technique doubly dangerous is when the nonprofit is in on it and does not care if the materials appraised are not actually what is received.
- 10The nonprofits refuse to produce a comprehensive inventory of everything they receive, independent of the appraiser’s list. They either simply do not care about the accuracy of the appraised materials or view this as too onerous of a task to add to their duties.
Most alarming is the alacrity with which appraisers respond to the requests to inflate appraisals from various bad actors within the industry. Their joy is not diminished even when the ultimate end-user, who faces the IRS audit with the associated disallowance of deductions and underpayment penalties, along with CPA and attorney fees, are the sole burden of taxpayers. While it may be said that many taxpayers should have known better than to work with these unethical appraisers and nonprofits, many go in blind thinking their deconstructed home is really worth $300,000 in materials when it is actually only worth about $60,000. Additionally, those within the industry who would like to use this tax deduction as a waste diversion environmental tool, are concerned the tax deduction may be axed should these unethical behaviors continue.
At Save Deconstruction Deductions and The Green Mission, Inc. we are working closely with the American Society of Appraisers (ASA,) Appraisal Standards Board and the International Society of Appraisers (ISA) to fix and remedy this industry from within. The areas of weakness are readily apparent. There are only approximately 16-20 deconstruction appraisers in the nation so ensuring ethical compliance should be easy to achieve.
